New Fallout in Dispute over Lease Accounting: FASB Plan Could Cost Wachovia $800M; BB&T, Fifth Third Sue

By Davis, Paul | American Banker, August 8, 2005 | Go to article overview

New Fallout in Dispute over Lease Accounting: FASB Plan Could Cost Wachovia $800M; BB&T, Fifth Third Sue


Davis, Paul, American Banker


Leasing arrangements that were popular tax avoidance tools for corporations more than a decade ago are now haunting some of the nation's biggest banking companies.

Several companies continue to do battle with the Internal Revenue Service, which since 2003 has been seeking back taxes on the arrangements.

And Wachovia Corp. of Charlotte disclosed last week in its quarterly filing with the Securities and Exchange Commission that it could record a one-time noncash charge this year of $500 million to $800 million related to a proposal backed by the Financial Accounting Standards Board that would force companies to recalculate the net investment of the leveraged leases.

Under the proposed changes to FAS 13, companies would recalculate to account for any changes in the timing of cash flows related to the lease. A 60-day comment period is set to end Aug. 18. Wachovia said it would probably take the charge Dec. 31.

A spokeswoman for Wachovia would not discuss the issue beyond the quarterly filing.

At issue are the lease-in, lease-out deals that were popular in the 1990s. Lilos can vary from one agreement to the next, but they typically involve large fixed assets such as power plants, subway systems, or other public facilities owned by local governments in the United States or by foreign governments.

IRS officials and tax experts have said that tax and leasing advisers marketed the shelters to large U.S. corporations seeking ways to cut their taxes. In 2003 several large banking companies disclosed that the IRS had sent them "notices of proposed adjustment" disallowing the tax shelters and seeking payment of back taxes.

Wachovia and the IRS settled all issues related to Lilos in June 2004; Wachovia agreed to change the timing of cash flows for those transactions. On Friday it said it has about $3 billion of Lilos, net of deferred taxes.

Other companies that are taking a more aggressive stance on the issue updated investors last week in their quarterly filings.

Fifth Third Bancorp of Cincinnati disclosed that it had filed a lawsuit in May in the U.S. District Court for the Southern District of Ohio over the issue. The company said that its initial investment in leveraged leases was about $900 million, and that it "continues to believe that its treatment of these leveraged leases was appropriate and in compliance with applicable tax law and regulations."

The suit also covers service contract leases and qualified technology equipment leases.

A Fifth Third spokeswoman said it has a policy of not discussing ongoing legal proceedings.

BB&T Corp. of Winston-Salem, N.C., filed a suit in October in the U.S. District Court for the Middle District of North Carolina to claim a $3.3 million tax refund tied to a 1997 leveraged-lease transaction.

A spokesman for BB&T said it has other Lilos, but that he did not know the extent of its exposure. BB&T is evaluating the effects of the proposed change to FAS 13, but a final determination could rely on the suit's outcome, he said. …

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